Professional Documents
Culture Documents
PUBLISH
JUN 23 1999
PATRICK FISHER
TENTH CIRCUIT
In re: COUNTRY WORLD CASINOS,
INC., formerly known as Monolite
Industries, Inc., formerly known as
Innovative Medical Technology, Inc.,
a Nevada corporation,
Clerk
No. 98-1342
Debtor.
COUNTRY WORLD CASINOS, INC.,
vs.
Appellant,
TOMMYKNOCKER CASINO
CORPORATION,
Appellee.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLORADO
(D.C. No. 96-M-2823)
Gary S. Cohen, Denver, Colorado (Arthur Lindquist-Kleissler, Lindquist-Kleissler
& Cooper, L.L.C., Denver, Colorado, with him on the briefs) for Appellant.
Michael E. Romero (Kathryn A. Wingard, with him on the briefs), Pendleton,
Friedberg, Wilson & Hennessey, P.C., Denver, Colorado, for Appellee.
Before ANDERSON, TACHA, and KELLY, Circuit Judges.
Background
This case arises out of the sale of real property in Black Hawk, Colorado
from Tommyknocker to Country World. The property was acquired by New
Allied Development Company (NADC) in 1990. NADC hired architects and
engineers to design a casino on the property and entered into a consent agreement
in 1992 with the Environmental Protection Agency (EPA) to remove
contaminated soil from the property. NADC then transferred title to the property
to Tommyknocker, its wholly-owned subsidiary. To avoid the filing of
mechanics liens for the amount owed to the architects and engineers for their
services, Tommyknocker and NADC issued a promissory note to those parties for
$475,000 in March of 1993, secured by a deed of trust on the property. This deed
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of trust is referred to as the Semple Brown Deed of Trust. The note provided that
the indebtedness was due upon sale of the property.
On July 29, 1993, NADC and Tommyknocker entered into a written
contract to sell the property to Monolite Industries, which later changed its name
to Country World. The purchase price of $11,492,500 was to be paid as follows:
$600,000 in cash at closing; a promissory note (Note) for $3,450,000, secured
by a second deed of trust on the property; and 2,250,000 shares of Country World
preferred stock valued at $3.33 per share. Closing took place on August 6, 1993.
As noted above, the Semple Brown parties held a first deed of trust on the
property. Because Tommyknocker did not then have enough funds to pay off the
Semple Brown note, the Semple Brown parties agreed to waive the due-on-sale
requirement. In their July 29 acquisition agreement, Tommyknocker and Country
World provided that [u]pon payment of at least $725,000 as a principal
reduction, Tommyknocker would pay off the Semple Brown note and the land
would be unencumbered by the Semple Brown Deed of Trust. Aplt. App. at 134.
This obligation was also reflected in the Note:
Notwithstanding the foregoing, in the event that Holder receives
from Maker a minimum of SEVEN HUNDRED TWENTY-FIVE
THOUSAND DOLLARS ($725,000) as the Accelerated Principal and
Interest Payment, Holder shall immediately secure the release of the
lien of that certain Deed of Trust and Security Agreement currently
encumbering the Property . . . .
Aplt. App. at 149.
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from a third
party in order to pay off the Note. Because there was a dispute about the amount
owed to Tommyknocker, Country World paid the undisputed amounts owed and
deposited the balance in an escrow account, pending the bankruptcy courts
secured claim hearing.
At the time Tommyknocker transferred title of the property to Country
World, it had not performed the environmental cleanup as required by the 1992
consent agreement with the EPA. However, Tommyknocker arranged for the
remediation after Country World took possession of the property, and Country
World reimbursed Tommyknocker for its costs, approximately $650,000.
After a three-day hearing in September of 1996, the bankruptcy court issued
its findings of facts and conclusions of law as to the parties liability under the
Note and Country Worlds claimed offset for the costs of the environmental
remediation. Both parties appealed to the district court, which affirmed the order
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of the bankruptcy court. However, the district court reversed the bankruptcy
courts finding of simultaneous defaults under the Note, holding that the failure
by Tommyknocker to use the money it received on January 13, 1995, to retire the
indebtedness due to Semple Brown and release that deed of trust was a failure to
perform a condition precedent to [Country Worlds] monthly payments. In re
Country World Casinos, Inc., 223 B.R. 809, 812 (D. Colo. 1998). Thus, the court
found that Country World was justified in withholding its monthly payments
beginning in May of 1995. Nonetheless, the court upheld the bankruptcy courts
refusal to suspend interest on the Note during the time that Country World
withheld monthly payments. Further, the district court upheld the bankruptcy
courts denial of a $650,000 offset for Country Worlds payments to
Tommyknocker for the environmental remediation.
In this appeal, Country World contends that the district court erred by (1)
holding that Country World was required to pay interest on the Note during the
time that it justifiably withheld monthly payments; (2) failing to award attorney
fees, costs and expenses to Country World as the prevailing party in litigation
related to the note; and (3) holding that the environmental contamination on the
property did not constitute an encumbrance, and thus denying Country World an
offset for the amount it paid for remediation.
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Discussion
In reviewing the decision of a bankruptcy court pursuant to 28 U.S.C.
158(a) and (d), the district court and the court of appeals apply the same standards
of review that govern appellate review in other cases. We therefore review the
bankruptcy courts legal determinations de novo and its factual findings for clear
error. In re Hedged-Investments Assocs., Inc., 84 F.3d 1267, 1268 (10th Cir.
1996).
erred in holding that Tommyknocker was entitled to interest on the Note during
the time that Country World justifiably withheld its monthly payments. Country
World presents two arguments that Tommyknocker was not entitled to interest,
one based upon the language of the Note itself and the second based upon
equitable principles.
Country World first argues that the Note expressly provides that the interest
would be suspended upon default of one of the parties: Tommyknocker was to
receive interest on the Indebtedness at eight percent (8%) per annum (Interest)
for so long as there exists no default under this Note. Aplt. App. at 148. The
district court found that, based on its reading of the remainder of the Note, this
provision refers solely to potential default by Country World and thus does not
authorize a suspension of interest upon default by Tommyknocker. We agree.
Each of the Events of Default identified in the Note concern Country World,
and the Note provides remedies for Tommyknocker upon default by Country
World. See id. at 149-151. Thus, the above-quoted provision does not provide
Country World the relief it seeks.
However, we find persuasive Country Worlds equitable argument for
suspending interest. Although the cases cited by both parties do not provide a
clear answer, except when a creditors improper acts or omissions prevent a
debtor from paying, we ultimately decide the issue based on the principle that a
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party to a contract cannot claim its benefits where he is the first to violate its
terms. Western Plains Serv. Corp. v. Ponderosa Dev. Corp., 769 F.2d 654, 657
(10th Cir. 1985).
Liberty State Bank & Trust v. Hemisphere Dev. Group, Inc., 296 N.W.2d
241 (Mich. Ct. App. 1980), relied upon by Country World, is not applicable to the
facts of this case. There the court stated that if the failure to make payment on a
note is due to any improper act or omission of the creditor, or to any conduct on
behalf of the creditor that prevents the debtor from complying with his obligation
to pay, accrual of interest on the note is suspended. Id. at 244 (citing Michaels
v. Mellish, 222 N.W.2d 247 (Mich. Ct. App. 1974)) (emphasis added). Country
World reads the emphasized disjunctive or as distinguishing between an
improper act of the creditor and conduct which prevents the debtor from meeting
his obligation to pay. Following this reading, Country World concludes that,
because Tommyknockers failure to obtain a release on the Semple Brown Deed
of Trust was an improper act, interest on the Note should be suspended. We
disagree with Country Worlds understanding of Liberty State Bank it is clear
that the disjunctive instead distinguishes between acts or omissions of the creditor
and actions taken on behalf of the creditor by an agent. In either case, whether
the creditor or the agent acts, the debtor must be prevented from paying before
accrual of interest is suspended. An example of such a situation is provided by
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Michaels, the case cited by the Liberty State Bank court, where the creditor
repudiated the contract and informed the debtor that he would accept no further
payments. It is clear that such a situation is not present in this case
Tommyknocker in no way repudiated the contract and otherwise did nothing to
prevent Country World from making its monthly payments.
Tommyknocker argues that Fisk v. Powell, 84 N.W.2d 736 (Mich. 1957),
and Bendik v. Sommer Bros. Constr. Co., 205 A.2d 692 (Pa. Super. Ct. 1964),
establish that Country World remained obligated to pay interest. In Fisk, the
Michigan Supreme Court held that the sellers breach of the covenant against
encumbrances did not excuse the buyers failure to make payments and did not
suspend the accrual of interest. See Fisk, 84 N.W.2d at 741-42. However, Fisk is
distinguishable from this case in that the district court here held that
Tommyknockers breach excused Country Worlds suspension of monthly
payments; thus the obligations of the parties were not independent as they were in
Fisk.
Bendik is also distinguishable from this case. There, a subcontractor filed
a mechanics lien in violation of the contract with the defendants. See Bendik,
205 A.2d at 693. The Pennsylvania Superior Court held that, although the
defendant was not obliged to pay the amount due while the lien was on file, the
defendant was required to pay interest on this amount. See id. This was because
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the money was due when the work was completed, which was a few days prior to
the filing of the lien. The court held that, by not paying the amount when due, the
defendant breached the contract first and thus that it would have been inequitable
to suspend the accrual of interest. See id. Bendik differs from our case in that,
according to the district court, Country World did not breach the contract. Thus
the equities do not favor Tommyknocker.
Country World views Sjoberg v. Kravik, 759 P.2d 966 (Mont. 1988), as the
most factually analogous case. There the court affirmed the trial courts finding
that, because of the defendants material breach, no interest would accrue on the
contract between the date of the breach and the time the defendants met their
obligation under the contract. See id. at 969-70. In that case, the defendants sold
the plaintiff some real property which was encumbered by a mortgage. Under the
contract, the defendants were to pay off the mortgage within a year, but failed to
do so for another five years. See id. at 967. As a result, the plaintiff alleged that
he was unable to obtain financing to develop the land and thus suffered
significant damages. See id. at 968. The case is unclear as to whether interest
should be suspended simply because there was a material breach, or because the
breach caused damages to the plaintiff. Not surprisingly, Tommyknocker argues
for the latter interpretation, and concludes that since Country World suffered no
damages, it must pay the accrued interest. Whether Country World suffered
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Country World justifiably withheld payment, until May of 1996, when Country
World prepaid the principle, would penalize Country World while benefitting
Tommyknocker. 2 Thus we hold that interest should have been suspended during
this time.
Although the Note does not address the payment of interest in this
situation, the nature of Tommyknockers breach persuades us that interest should
be suspended. The record indicates that Tommyknocker did not pay off the
Semple Brown Deed of Trust because (1) it had other past due obligations, see In
re Country World Casinos, Inc., 223 B.R. at 810, and (2) it never intended to pay
face value, see Aplt. App. 104. The bankruptcy court credited the testimony of
Tommyknockers president that she thought the Semple Brown parties had
charged too much and she never intended to pay them $475,000. See id. The
bankruptcy court found that she:
2
always intended to try and chisel them down, even after she had
signed the Semple Brown promissory note on March 5, 1993, even
after she had signed the sales contracts on July 14 and July 29, 1993,
which required pay off of Semple Brown, and even after she signed
an Amendment to the Semple Brown promissory note on August 6,
1993 . . . which provided for TKCC and NADC to pay the entire
principal balance and all unpaid accrued interest when TKCC had
received the $750,000 from the Debtor.
Id. Moreover, when Country World justifiably withheld its monthly payments,
Tommyknocker foreclosed, resulting in Country World filing its Chapter 11
bankruptcy petition. See In re Country World Casinos, Inc., 223 B.R. at 811.
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to Tommyknocker for the eighteen-percent default interest under the Note. These
findings are not in dispute, and the predominant matter before the bankruptcy
court was liability under the Note. Thus we hold that Country World is the
prevailing party under the standard articulated in City of Aurora and Travers. As
such, Country World is entitled to reasonable attorney fees and costs pursuant to
the contract.
commitment contained within this clause that it would be required to pay for the
cleanup; instead, the clause was inserted because of Country Worlds concern
about Tommyknockers inability to pay for the cleanup. Country Worlds entire
argument on this issue is premised upon its assertion that environmental
contamination is an encumbrance for the purposes of the covenant against
encumbrances in a warranty deed.
Blacks Law Dictionary (6th ed. 1990) defines a covenant against
encumbrances as [a] stipulation against all rights to or interests in the land
which may subsist in third persons to the diminution of the value of the estate
granted. Id. at 364. Country World quotes the following language from Feit v.
Donahue, 826 P.2d 407 (Colo. Ct. App. 1992):
An encumbrance within the meaning of the covenant is a right or
interest in the land which diminishes the value of, but is not
inconsistent with the ability to convey, fee title. It includes any
burden resting not only on the title to the real estate, but on the real
estate itself which tends to lessen the value or interfere with its free
enjoyment.
Id. at 410 (quoting 7 G. Thompson, Real Property 3183 at 272 (1962)). Feit
dealt not with environmental contamination, but with an existing zoning violation
which the court held to be an encumbrance.
The broad language from Feit seems to support Country Worlds assertion
that the environmental contamination also constitutes an encumbrance. Country
World also relies on Jones v. Melrose Park Natl Bank, 592 N.E.2d 562 (Ill. App.
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Ct. 1992), where the court held that the presence of hazardous waste materials . .
. is sufficient to preclude defendant from tendering merchantable title to
plaintiff. Id. at 568. In that case, the seller specifically warranted that it had
received no notice of EPA violations, despite its knowledge that there was a soil
contamination problem and that an EPA penalty had been proposed before and
after the contract was signed.
However, the majority of cases hold otherwise. In HM Holdings, Inc. v.
Rankin, 70 F.3d 933, 936 (7th Cir. 1995), the Seventh Circuit stated that every
court that has addressed the issue has refused to expand the marketable title
doctrine to make the presence of hazardous waste an encumbrance on title, and
opined that a buyers remedy in situations where environmental cleanup is
required would have been to include an environmental contingency clause in the
contract or to insist on warranties against such conditions. See also Donahey v.
Bogle, 987 F.2d 1250, 1254 (6th Cir. 1993), vacated on other grounds, 512 U.S.
1201 (1994) ([A]n encumbrance is . . . something . . . that diminishes the value
of the title to the property; environmental contaminants may diminish the value of
the realty, but they do not constitute an encumbrance because they do not affect
title.); Cameron v. Martin Marietta Corp., 729 F. Supp. 1529, 1532 (E.D.N.C.
1990) (holding that, although defendant transferred property which was
contaminated by chemicals in violation of state and federal regulations, plaintiffs
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I respectfully dissent from that part of the majority opinion reversing the
district courts holding that Country World was required to pay interest on the
Note after May of 1995. The majority holds that allowing the accrual of interest
would be inequitable because it would penalize Country World while benefitting
Tommyknocker. Majority op. at 12. I disagree.
Denying the accrual of interest following Tommyknockers breach amounts
to an additional penalty on Tommyknocker, apart from any obligation it would
have to pay damages to Country World, if any had been proven, following its
breach. Moreover, it could amount to a windfall for Country World, which had
the use of the money justifiably withheld. Finally, the case upon which the
majority primarily relies for this equitable holding, Western Plains Serv. Corp. v.
Ponderosa Dev. Corp., 769 F.2d 654 (10th Cir. 1985), is factually different from
this case, and makes it clear that the analysis of whether accrued interest should
be paid following a breach is much more complicated than simply inquiring into
which party first violated the terms of the contract. In short, I think the district
courts analysis and disposition of this issue was cogent and correct, and, for the
reasons stated in its opinion, I would affirm the district courts judgment in its
entirety.